Robert McWhirter's Top Picks: Nov. 25, 2019

Robert McWhirter, president of Selective Asset Management
Focus: Canadian dividend and small-cap stocks (industrial, technology and healthcare)

MARKET OUTLOOK

Technical analyst Leon Tuey identified the start of the current North American equity bull market many years ago. He continues to believe that there is much more upside left. On Nov. 23, he wrote: “Very few understand the power and durability of this great bull market…Despite its longevity and the spectacular gains already achieved, this bull market still has a long way to go in terms of time and distance. In baseball parlance, the game is probably at the top of the fourth or the fifth inning.”

U.S. Federal Reserve Chair Jerome Powell suggested that in order to keep the U.S. economic expansion going, the Fed will continue to be supportive. The dividend yield on over half of S&P 500 stocks is above the 1.76 per cent yield on U.S. 10-year bonds (which is also a positive driver for U.S. equity prices).

One quantitative and technical analyst at Cormark Securities, Mark Deriet, recently recommended a continuation of selling defence stocks in favour of cyclical stocks. His breadth measures bottomed in December 2018. The last time breadth bottomed in February 2016, cyclicals outperformed defensives by 33 per cent.

We expect this rotation will benefit the relative performance of TSX stocks and that North American equities will continue to move higher over the coming year. 

TOP PICKS

 CONSTELLATION SOFTWARE (CSU:CT)

Constellation acquires, develops, manages, builds and distributes vertical market software (VMS) for corporate, government and government-linked customers. 

On Oct. 31, Constellation reported a 16 per cent year-over-year increase in sales per share. When added to the 27 per cent EBITDA margin, it gives a Rule of 40 score of 43 per cent (B-). Cash flow per share grew by 28 per cent, and Constellation’s 44 per cent four-quarter-trailing return on invested capital ranks well (A-). 

Cash flow per share is forecast to grow 25 per cent in calendar 2020, with further 20-per-cent growth forecast for calendar 2021.

ENGHOUSE SYSTEMS (ENGH:CT)

Enghouse provides customer interaction software and services to manage customer communications. It also provides a range of products to telecom service providers, utilities and the oil and gas industry. 

On Sep. 12, Enghouse reported a 16 per cent year-over-year increase in sales per share. When added to the 41 per cent EBITDA margin, it gives a Rule of 40 score of 46 per cent (B-). Enghouse’s 18.3 per cent four-quarter-trailing return on equity also ranks well (A-).

Cash flow per share is forecast to grow 57 per cent in calendar 2020, with a further 18 per cent growth in calendar 2021. The 2020 price to cash flow multiple of 19.4 divided by the 57 per cent forecast cash flow growth is 0.34 (C+)

TERANGA GOLD (TGZ:CT)

A very speculative gold company with a producing gold mine in Senegal. Their Wahgnion mine in Burkina Faso is ramping up to commercial production and is 800 kilometres south of Semafo’s Boungou mine, which was recently closed a result of the deadly attack on Semafo’s employees on a road to the mine site.

Teranga’s cash flow per share estimates for 2020 and 2021 have been revised upwards in excess of 20 per cent in the past 90 days. Cash flow per share is forecast to grow 90 per cent in calendar 2020, giving a 2.5 times price to cash flow multiple. This is a 65 per cent discount to price-to-cash flow multiple of the materials index.

Taranga’s mine is 20 kilometres away from Barrick Gold’s Massawa 4-gram-per-ton gold property, which Barrick has said is up for sale. Teranga would be the logical buyer if they can agree on the purchase price and secure the necessary financing for the estimated $385 to $450 million cost.

 The $8 median price target by three analysts implies 48 per cent upside potential.

PAST PICKS: JAN. 16, 2019

EMERA (EMA:CT)

• Then: $44.96
• Now: $54.40
• Return: 21%
• Total return: 27%

 NORTHLAND POWER (NPI:CT)

• Then: $22.82
• Now: $27.90
• Return: 22%
• Total return: 27%

ROGERS COMMUNICATIONS (RCI/B:CT)

• Then: $77.69
• Now: $63.55
• Return: -11%
• Total return: -9%

 Total return average: 15%